Why Britain's broadband is heading for the slow lane

The UK generates more money online than any other G20 nation, but lack of investment leaves downloads 16th slowest in Europe

While other nations have fibre optic cables running to all the way to households, the UK's broadband relies on copper connections from BT's fibre network only running as far as the street. Photograph: Jeffrey Hamilton/Getty Images

The internet is a bigger part of the British economy than education, healthcare or construction. Britons generate more money online than any other G20 nation. But when it comes to high-speed broadband, the country is falling behind.

The UK's average download speed is ranked 16th in Europe, according to IT company Akamai, and experts warn that the country is beginning to miss out as a result.

"Britain is being frozen out of the next industrial revolution," Peter Cochrane, a former BT chief technology officer, has warned. "In terms of broadband, the UK is at the back of the pack. We're beaten by almost every other European country and Asia leaves us for dust."

While other countries are racing to replace the old copper telephone networks with fibre optic cables running right to household doorsteps, and capable of almost unlimited speeds, the UK has settled for a compromise.

BT Group, with a network that reaches nearly every home in the country, is laying fibre to cabinets in the streets, and relying on copper to carry the broadband signal the last leg to the doorstep. Today, that means speeds limited to 80 megabits per second (Mbps), compared with 1,000Mbps or more available in all-fibre networks.

Russia already has 12m homes with fibre to the doorstep. France has 6m and says 70% of premises will be connected by 2020. The UK has just 400,000, and there are no targets to increase that number.

Ministers rank broadband as one of Britain's top four infrastructure priorities, alongside roads, rail and energy, and George Osborne has committed £200bn to these sectors over the next five years. But a fraction of that will go to broadband – just £1.3bn from local and central government has been earmarked.

If the UK had committed as much as the Chinese per head of population, some £7bn of taxpayer funds would be invested. Australia is pushing fibre to 93% of homes by 2018. In the UK, this would cost up to £29bn.

The government has made a rather vague promise that we will have the best superfast broadband network in Europe by 2015. And by 2017, 90% of homes will have access to superfast speeds, with the final 10%, the most remote dwellings, getting a basic 2Mbps service.

BT says it will pay for two-thirds of the work itself, but the government and local councils are finding most of the money needed to reach the final third of the population through a process being organised by the BDUK quango.

Superfast is defined by the government as 24Mbps and over. BT says two-thirds of homes will have access to its Infinity product of up to 80Mpbs if they want it by the end of 2014, with rival Virgin Media offering even higher speeds via its cable network to 12m of the UK's 26m homes.

"In terms of superfast broadband the UK will be among a leading group by 2015, but the trade-off is there will be very little ultrafast fibre to the home," says Rupert Wood at research house Analysys Mason. All-fibre networks take time to build and Wood believes if the UK wants one it must start planning now.

"Eighty Mbps is more than people need," says BT's strategy head, Sean Williams. "We are not of the school that universal fibre to the premises is the solution."

BT believes it will finish its rollout on time, if not ahead of schedule. Gangs of engineers and cable-layers have been hired, with ex-servicemen drafted in to dig for broadband Britain. "We are going as fast as we possibly can and as widely as we possibly can," says Williams.

No matter how quickly BT digs, though, fibre evangelists say that by 2017, the national targets will be out of date. We will have moved from needing superfast to wishing for ultrafast broadband. Television and Skype video calling will demand more than BT's hybrid network can cope with.

"These targets are fulfilling the demands of the past," says Boris Ivanovic, the entrepreneur whose Hyperoptic group is selling fibre connections to upmarket UK apartment blocks. "Fibre to the cabinet is a stop-gap solution, and will not put the UK in a leadership position."

He says the £17bn committed by the government to a high-speed rail line from London to Birmingham could cover most of the costs of a future-proof all-fibre network. "If we had those links we wouldn't need to travel as often to Birmingham and we wouldn't be polluting the environment as much."

With the number of screens per household increasing, watching television is becoming an increasingly solitary activity. Even with a 100Mbps connection, a Blu-ray quality film takes 13 minutes to download. BT's top-tier broadband services can cope with streaming several high-definition channels at once, but ultrahigh definition is on its way. The Japanese state broadcaster NHK will use it to record the London Olympics, with public screenings promised, and speeds of 100 to 200 Mbps are needed to transmit a single channel.

"If the country is happy to travel at the speed determined by the driver that is fine, if we want to force the driver to accelerate then we have to change the model," says Francesco Caio, a former Cable & Wireless chief executive and a government adviser to the last government on broadband infrastructure.

He says the ultimate aim should be "infinite bandwidth between any two points in the country" and that no single company is capable of achieving that. Instead, the government should recreate the kind of national company through which the state built the copper network before BT was privatised. This could be owned by the existing telecoms companies and need not involve piles of taxpayers' cash.

To get fibre to rural and sprawling suburban areas, TalkTalk, BSkyB, Virgin, BT, and perhaps the state could jointly invest. The new company would concentrate on laying the pipes and have no direct relationship with consumers. Prices would be capped by regulators, and in exchange Virgin Media and others told to stay out of its territory.

TalkTalk's chief executive, Dido Harding, argues that the priority should be getting more of the country online. Many of those left behind are elderly, on low incomes or have poor English. "I think that Britain's broadband vision needs to be about more people using broadband rather than macho claims about the speed of the technology," says Harding. "The UK has got 8 million people who have never used the internet and they are often the people in society who would most benefit from it."

To make this happen, she says the government should deliver more services online, so that people have no choice but to log on, while also working with companies to make connections cheaper. TalkTalk customers on benefits can get a £49 reconditioned computer and £5-a-month broadband. Harding also believes the prices at which BT rents its fibre to broadband resellers such as hers is too expensive. She wants the telecoms watchdog Ofcom to begin consulting this year on the prices BT should charge for fibre after 2014, when it will have reached two-thirds of the UK.

TalkTalk and Sky have no intention at the moment of laying their own fibre. But they want to rent BT's fibre at the same low prices they pay for access to copper broadband. Even BT recognises that the broadband market only took off when other companies got involved and competition forced customer prices down.

"Competition drives growth in the end as opposed to monopolies. The regulatory framework today is a little too skewed to driving investment and not enough to driving competition."

With BT reporting its annual results on Thursday, the Guardian is starting the debate over what new targets the government should set. We will be asking the experts and you, our readers, for ideas on what Britain's Broadband Vision should look like.